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Buffett's Heinz Buy Is Weird, Trust Me

By now I imagine you’ve all heard the news about H.J. Heinz. In a blockbuster-massive-surprise-and-other-clichés deal, Berkshire Hathaway and 3G Capital of Brazil have announced they have agreed to acquire Heinz for $28 billion, a 20% premium to Wednesday’s closing price of $60.48.

Berkshire Hathaway and 3G will each put in about $4 billion for common stock, another $8 billion from Berkshire for preferred stock, and the rest being covered with debt by JPMorgan and Wells Fargo.

He’s even gone so far as to call it “Orwellian,” saying that the firms themselves don’t equip companies in any way for the future, larding up the companies with debt they can’t afford in a way that is ultimately destructive.

Berkshire Hathaway’s typical M.O. is to buy a stable company with cash, and then hold onto it in perpetuity without killing the golden goose. Heinz fits this pattern in that it’s a stable, profitable company, but the transaction strategy itself is the weird bit.

The end game here is the clear question. Private equity firms, by their very nature, do not buy companies only to hold them forever. They flip them. Sell them. And move on to the next investment.

But that doesn’t seem to be the point here. With an expensive purchase price approaching a 14X EBITDA multiple, flipping Heinz in an IPO in three years wouldn’t bring a high enough of a return to justify the effort, industry sources tell me.

Heinz is a stepping stone to a larger food conglomerate, those sources say. Up next for a mega-deal could be the Campbell Soup Company, or even Kraft.

Neither one of those has really been mentioned as a target before. But with a deal as weird as this one, don’t let Buffett surprise you again.

Michael Ballaban covers consumer and retail and can be reached at michael.ballaban@mergermarket.com. Follow him on Twitter at @MergerMike.

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